Monetary Policy Operations and the Financial System

Ulrich Bindseil

Abstract

This book provides an introduction to central bank monetary policy operations in normal and crisis times. Since 2007, central banks of industrialized countries have counteracted financial instability, recession, and deflation risks with unprecedented monetary policy operations. While generally regarded as successful, these measures also led to an exceptional increase in the size of central bank balance sheets. The book first introduces the subject by explaining monetary policy operations in normal times, including the key instruments: open market operations, standing facilities, reserve requir ... More

This book provides an introduction to central bank monetary policy operations in normal and crisis times. Since 2007, central banks of industrialized countries have counteracted financial instability, recession, and deflation risks with unprecedented monetary policy operations. While generally regarded as successful, these measures also led to an exceptional increase in the size of central bank balance sheets. The book first introduces the subject by explaining monetary policy operations in normal times, including the key instruments: open market operations, standing facilities, reserve requirements, and the collateral framework. Second, the book reviews the basic mechanics of financial crises as they have hit economies many times, and what central banks need to do when financial markets and banks are impaired to fulfil their monetary policy and financial stability mandates. Besides demonstrating the need for non-conventional monetary policy measures, the book also highlights their dangers, such as moral hazard and increased central bank risk-taking. The book draws a number of lessons from the crisis on non-conventional monetary policy operations, assessing what measures have worked well, and how a framework should be designed in future normal times such as to contribute to making financial crises less likely. The book provides simple theoretical models and systematically applies a financial accounts approach in order to capture comprehensively all financial flows in the economy that are relevant for monetary policy operations and the central bank role as lender of last resort.

End Matter

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